June 13, 2009

The Middle East arm of HSBC sees great potential in Iraq, and is planning to expand its operations there as security and the country's legal framework improves, the bank's regional chief said. In 2004, HSBC bought 70 per cent of Iraq's Dar es Salaam Bank, which has 14 branches, and is now eyeing growth in infrastructure projects and supporting businesses as violence ebbs and Iraq rebuilds after years of war, said a report in our sister publication, the Gulf Daily News.

"We're only scratching the surface as far as I'm concerned," HSBC Bank Middle East chairman Youssef Nasr said.

"Even though the situation has improved on the security front, the size of the economy, the activities in which we can get involved is still a fraction of what is to come."

Iraq's banking sector is tiny by global standards - Dar es Salaam has a capital of 50 billion Iraqi dinars ($43 million) - and the state controls some 80pc of gross domestic product, generated almost entirely through oil sales. Much of Iraq's banking sector is state run, and now only about 37 per cent of customer deposits are placed with 30 or so small private banks.

Yet Nasr was optimistic money would filter through to the general population of Iraq from government oil sales, following a pattern seen in other Arab states.

"In most Middle Eastern oil exporting countries the big money started in the hands of the state and the national oil companies ... Some of the top Gulf family companies made their money subcontracting for the national oil companies," he said.

Iraqi private banks said they had seen profits soar - albeit from a low base - in 2007 and last year as Iraq spent on investment projects and boosted state salaries, although a fall in oil prices since then has forced budget cuts.

Dar es Salaam did not provide its financial statements, but Nasr said its profits had grown too.

"It went from a loss making proposition in 2006, to a small profit in 2007 to a much larger profit in 2008," Nasr added.

Yet banks and other businesses in Iraq face several challenges. Bombings and shootings are still common, and the insurgency triggered by the 2003 US-led invasion remains stubborn in parts of the country.

Iraq's legal and regulatory framework is nascent and its all important hydrocarbons law - which would determine how its vast oil reserves are exploited and shared - is bitterly contested and has been delayed for years.

Oil infrastructure projects in Iraq's semi-autonomous Kurdish region are subject to doubt due to Baghdad's rejection of Kurdish deals signed with foreign oil firms.

"The oil law will determine a better comfort zone in terms of which entities ... are going to be recipients of oil money, what their authority is going to be in investing or spending," Nasr said, when asked which laws were key to HSBC's Iraq plans.

Iraq has also only in recent weeks begun to outline the property and real estate ownership rights of foreign investors.

"If we're going to do commercial or residential mortgage lending, we've found that up to this point the legal system is not as robust as it should be," Nasr said.